Liam Dann: Why David Seymour’s hardline monetary policy is a bad idea

Essentially, David Seymour is arguing for a return to the days when the Reserve Bank Governor had one job - to crush inflation at all costs. Photo / Jason Oxenham

OPINION

Inflation is bad and we need to get it back under control. But we shouldn’t forget that high unemployment is often worse.

It is easy to forget that it is worse. Partly because when it comes to economics we tend to focus on the issue in front of us at any given time.

Unemployment has been low, by historical standards, for the past six years. It hasn’t been really bad for more than a decade.

But it is now on the rise as monetary policy starts to do its inflation-busting job.

Higher interest rates will slow the economy. Consumers will spend less, businesses will grow more slowly, if at all. Fewer jobs will be created and some firms will start laying staff off.

Even if it all follows the script, the official unemployment rate is expected to reach 5 per cent. That would still be considered a soft landing, after the turmoil of Covid.

Of course, it won’t feel like it to those who find themselves unemployed. It will be an awful, life-changing time.

The other reason unemployment might not seem as bad as inflation is that it usually happens to someone else.

We all feel the pain of inflation, but the burden of unemployment is specific. And it isn’t equally shared.

Like some kind of dystopian game of Lotto, we can hang on to hope that our number won’t come up, even when unemployment is on the rise.

The odds of that game are not evenly stacked. The statistics are stark. The unemployment rate for Māori and Pacific people typically runs at twice that for the total population. It also skews heavily towards the youngest working-age group.

So while the overall unemployment rate dropped to record lows of 3.3 per cent for 2022, it was 8.1 per cent for 15- to 24-year-old Pākehā. And it was 13.5 per cent for 15- to 24-year-old Māori.

If our so-called “soft landing” sees the overall unemployment rate lift to 5 per cent, then we might expect the rate for the Māori to rise to 9 per cent. The rate for young Māori could rise to around 18 per cent.

It should be a source of national shame that these figures would still be historically low.

In the wake of the Global Financial Crisis, the overall unemployment rate rose to about 7 per cent. But it hit 13.5 per cent for the Māori population and a staggering 27.8 per cent (in 2010) for Māori aged 15-24.

This is a structural inequality we should all be in favour of addressing. The primary reason for tackling it is that it is unfair.

But even if you put empathy aside, high unemployment is bad for all of society. It dislocates and disengages people from a shared investment in social order. It drives mental illness, homelessness and crime.

At its worst, inflation also causes social breakdown as it erodes trust in money and the economy.

But when we look at the urgency required to deal with inflation we need to keep things in perspective. We shouldn’t conflate the hyper-inflation of 1920s Germany with annoyingly expensive lettuce, for example.

(For the record iceberg lettuces are back at $2.50 this week.)

It's back to being a good time for lettuce fans. Photo / Getty Images

In other words, I think we should look at the trade-off between inflation and unemployment within the context of New Zealand’s recent historical experience, not the world-shaking extremes of the 20th century.

This lack of social context is why I’m not a fan of the Act Party’s hardline monetary policy approach.

Act’s policy, as outlined by David Seymour in the Herald last week, involves scrapping the Reserve Bank’s (RBNZ) employment target, getting rid of its Monetary Policy Committee (MPC), lowering the RBNZ’s inflation target and reducing the flexibility it has around how quickly it meets this target.

Essentially, Seymour is arguing for a return to the days when the Reserve Bank Governor had one job - to crush inflation at all costs.

It’s not hard to make a popular political case for that right now while inflation is such a pressing concern.

But the potential result of rigorously applying monetary policy in this manner would be a disaster for the poorest and most vulnerable in this economy, as it would mean much higher unemployment.

It would also mean higher interest rates and would be extremely tough on large numbers of ordinary Kiwis already struggling to pay the mortgage.

It would certainly put the burden of rebalancing the economy firmly on the shoulders of younger generations.

I say “potential result” because I don’t think we’ve ever had a Reserve Bank Governor who was so hawkish that they’d apply monetary policy without regard to social context, regardless of the wording.

Monetarism works. It controls inflation. I’m a big fan... to a point. But the idea that it is so special that it should be deployed without wider context is a dangerous one.

Ironically, I think it involves the same levels of ideological zeal that the likes of Seymour (quite rightly) dismiss on the left.

Like socialism, pure monetarism can look good in an academic paper but in the real world, it is grossly one-dimensional stuff.

The social cost of unemployment is one of a multitude of dimensions that shape a modern economy.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.